A Debt Management Plan is an informal arrangement with your creditors. You pay them as much as you can afford each month, which is less than the standard monthly payment, and ask them to freeze interest. Check out the DMP Flowchart to see if it is a good option for you. A key figure for you to focus on is the length of time it will take to clear all your debts if all your creditors freeze interest.
DMPs can be short term. They are a great option if you expect your situation to improve. Some examples: you are redundant and it may take a few months to get a new job; your children have left home so when your tenancy ends you will be moving to somewhere smaller; the HP on your car will finish in a few months; you have put the house on the market and can clear your debts when it sells.
In these situations, it doesn’t matter if you can only pay £5 to each of your debts (this is called a ‘token payments’ DMP) – or even nothing. A short-term DMP is the umbrella in the picture – it stops the man getting rained on (interest on your debt is frozen) but it doesn’t solve his debt problem.
A DMP can also be the long-term way of clearing all your debts. This can work well, but you need to be aware of the things that may go wrong with long term DMPs:
- Your creditors do not have to agree to the DMP and freeze interest. They may phone you and write to you a lot, especially at the start.
- If they do agree it may only be for 6 months after which you will have to supply another Financial Statement. They can later change their mind or sell the debt on so you have to persuade another creditor to agree.
- A creditor may decide to take court action, going for a County Court Judgement (CCJ). If you have equity in your house, it is possible that a creditor may seek a charge over your house.
- If your DMP will last a very long time then you may have to cope with a lot of things going wrong – the car becoming very expensive to maintain, the boiler dying, house maintenance jobs accumulating, household goods have to be replaced, needing to move house etc
- After a few years your debts will have dropped and a creditor who has so far been happy to freeze interest may start charging interest again as your payment is now more than the usual monthly amount, so your DMP will have to go on for longer than you thought.
The more money that you owe, the longer the DMP will take. The more equity you have, the more likely you are to have problems with a long-term DMP and the more important it is for you to consider other ways of tackling your debt problems that are more certain.
But if you are hesitating about going bankrupt, or uncertain about whether you could live off a restricted budget for an IVA, then a DMP is a good stop-gap for a few months whilst you think things through. If no other debt options will work for you, then a DMP, however long, may be your only fall back.
Pros gives you a breathing space to get your finances sorted out, hopefully stops your debts increasing with interest and charges being added
Cons may take a very long while, not all creditors may agree to freeze interest, won’t stop creditors contacting you or even taking court action, most creditors will report an agreed DMP as a default on your credit file
Debt Camel says Short term DMPs are good options, it’s the long-term ones that sometimes come unstuck.
Setting up a DIY DMP
In a “DIY DMP” you write a letter to each of your creditors saying that you cannot make the usual monthly payments because your circumstances have changed, offer them £x per month and ask them to freeze interest and charges.
Although you can have a managed DMP (see below), organising your DMP yourself has advantages if you feel confident dealing with the paperwork as it leaves you in control of your finances and you can make changes if your income / expenses alter (although you shouldn’t be doing this every month!) Also DMP management companies require a minimum level of payments to be made and you may not be able to afford these.
National Debtline has sample letters to creditors that you can use. There is one for ‘pro rata’ offers and one for ‘token or no payment’ offers. Broadly if you have more than £5 per creditor to pay each month you should use the ‘pro rata’ letter. If you have used the budget sheet on the Financial Summary page then there is a function to calculate pro rata payments and to print a version of the Financial Statement to include with your letters to creditors. (A few creditors will irritatingly not accept a letter from you but want confirmation from a debt advisor that your budget is accurate. In this case go to your local CAB with a copy of your Financial Statement and ask them to write to the creditor on your behalf.)
An alternative is to use the new online CABmoney DMP service. Here you put in details of your debts and expenses / income, the system will then generate pro-rata letters to creditors and also follow-up letters. See an example with sample screenshots.
If you owe money to a bank that you have your usual bank account with, you will need to open a new one with a different bank and move your wages, direct debits and standing orders over there – otherwise when the creditor gets the letter about the DMP, they may decide to help themselves to the money in your current account leaving you with not enough to live on :( Don’t think this can’t happen to you – it is a nightmare for those people it does happen to.
You should expect to get cross phone calls and letters when your creditors receive your DMP letter. To help you feel in control, be well organised: keep all your letters to and from your creditors in a file and also have a sheet for each creditor where you make a note of phone calls. You need to be firm – just repeat that you have shown them your budget and you cannot afford any more than the £x a month you have offered. If they threaten to take you to court, they are probably bluffing, but it is possible. In this case you use your budget to complete the Income and Expenditure details on the court form and make an offer of £x a month – exactly what you have already offered. Normally the judge will accept this. Your creditors know this – that is why court action is not common.
Getting a managed DMP
There are two organisations that will set up a DMP for you and not charge you anything, so all your payments go to your creditors: StepChange (used to be known as CCCS) and Payplan. There is no significant difference between them, so it doesn’t matter which one you contact. There is no point in deciding to talk to both of them – you are just wasting your time and theirs.
There are other companies that charge you for operating a DMP – these advertise widely but you should not use one of these under any circumstances. Their service is no better than StepChange or Payplan and the DMP will last longer as less money is going to your creditors. They usually take the first two months’ payments into your plan as upfront costs followed by 15% of your monthly payment plus VAT – there is a calculator at Debt Wizard that shows just how much these fees can prolong your DMP.
You should contact StepChange or Payplan by phone or email and get a phone appointment at which your situation will be discussed. Have your Financial Summary and a list of your creditors in front of you during this phone call as this is the first thing they will want to explore with you.
If you can only afford to make token offers (see above) then normally StepChange and Payplan will not take you on as a client and you will have to write to your creditors yourself – see the DIY DMP approach above.
Sometimes they will suggest that you should consider another approach to dealing with your debts – you should take this suggestion seriously and ask them to explain what the advantages of this would be. If you don’t feel comfortable with this, think about getting a ‘second opinion’ – see other places to get debt advice.
If StepChange or Payplan agrees to set up a DMP for you, they will want you to confirm it in writing and they will explain the procedures. For the first month or two you may well still get calls and letters from your creditors, but as the DMP settles down, most creditors will stop bothering you.